Approaches of various US regulators to tokens and cryptocurrency

27 June 2018

Given the fact of accountability of various regulators to the US Congress, including the US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), it is the task of the US lawmakers to push the enforcement of the bills and acts on these bodies and monitor their compliance. So far as the Congress remains amorphous about the blockchain and cryptocurrency industry, the regulators put forward their own ideas and guidelines on how new technologies should be addressed and controlled, placing the projects and startups in a position, when they have to comply with the rules of different agencies that may lack consistency.

CFTC treats cryptocurrency as commodity

The general point of view kept to by the CFTC with respect to cryptocurrencies and tokens comes to that they should be treated as commodities. Thus, any cryptocurrency like Bitcoin or Ethereum in the context of the regulation is viewed upsides with gold or silver rather than currency or security, because, as the CFTC puts it, they are not supported by the government and involve no liability attached.

Brian Quintenz, a CFTC Commissioner, explaining the nature of crypto-tokens in the eyes of the regulator, noted that tokens may eventually transform from a security status subject to the SEC regulation, as they are used for raising the capital, to become a commodity in a short term.

SEC treats cryptocurrency as securities

The US Securities and Exchange Commission upholds a different view, in most cases approaching to the cryptocurrency and crypto-tokens as to securities. The regulator applies the Howey Test to the cryptocurrency-related activity to understand the nature of the affected transaction. As long as in many cases tokens are sold as an investment into a common enterprise with investors expecting to derive a potential profit for the efforts of other people, such transactions should be subject to securities regulations.

During the talk with CNBC in early June, Jay Clayton, a chairman of the U.S. Securities and Exchange Commission, noted that startups launching the sales of cryptocurrency tokens should comply with the legislation.

He noted that the companies having intent to sell a token or a stock in a private placement, such business should follow the private placement rules, and if a startup wants to hold an IPO with the token sales, such startup should consult the SEC and the Commission will provide assistance in arranging this public offering.

He said that if a token or a digital asset is offered in a way, where an investor is promised a return on the investment, this token will be viewed as a security, and the Commission’s rules will, hence, be applicable to it, meaning that it will regulate this security and the trading process.

Bob Pisani from CNBC asked Clayton, if the regulator has future plans to provide a detailed statement on the token regulation, and Clayton said that he just did it.

IRS takes it as property

The Internal Revenue Service (IRS) believes that cryptocurrencies should be viewed as property and if they are sold for a profit, taxpayers should report these transactions in their capital gains. In this regard, the regulator published its guidance in 2014 requiring the US citizens to report received or mined cryptocurrencies when they make calculations of their gross income, and the digital currency should be included into the reports at the fair market value as of the date it was obtained.

This March, the regulator issued its memo to make it clear for the Americans that they have an obligation to report their earnings in cryptocurrency when filing their tax returns. The IRS underlined that anonymity of cryptocurrency transactions is delusive.

FinCen takes it as money

The Financial Crimes Enforcement Network (FinCen) holds to a position that tokens have to be viewed as money. According to the FinCen, Initial Coin Offerings should be regulated under the money transmitter rules pursuant to the Bank Secrecy Act, and as such should mandatorily pass the registration with the authorities and collect information about their customers, reporting any activity looking as suspicious.

The letter drawn by the FinCen’s Assistant Secretary for Legislative Affairs, Drew Maloney, and published in March, noted that the regulator will be applying its rules to the ICOs, and any exchange selling ICO coins or tokens or exchanging them for other digital currencies, fiat currencies or other values in substitution of the currency, would be typically treated as money transmitter. Add to that the fact that about 100 cryptocurrency exchanges are registered with the FinCen.

The agency, however, made a reservation in the same letter that in some cases ICO campaigns fall under jurisdiction of the SEC and CFTC.